Kerry Group has turned in a sparkling set of half-year results, with strong growth in its ingredients and consumer foods businesses more than balancing out a weaker performance in the Irish dairy business.
The continued strong performance and a bullish current trading comment with the results has led to speculation that Kerry might be back on the acquisition trail earlier than expected. A spokesman said, however, that while the group was focusing on expansion in Latin America and the Far East, "we're still a time away from a major acquisition - 12 to 18 months". He added that Kerry has the financial strength to make a major acquisition given the strength of its cash flow and its ability to pay down debt. Kerry has used debt for most of its acquisitions and has raised equity only very sparingly in the past. A rights issue to raise cash is "not likely", he added.
Pre-tax profits were up almost 24 per cent on the restated first-half 1996 figure to £31.9 million while turnover was up just over 6 per cent to £625.2 million. Operating profits recovered from 6.8 per cent to 7.2 per cent, while the key ingredients business boosted operating margins from 8.8 per cent to 9.2 per cent. Moreover, in a move that brings Kerry into line with most other public companies, the group has decided to write off the accumulated goodwill on acquisitions - over £350 million - instead of amortising the goodwill and writing it off over a period through the profits-and-loss accounts.
This has had the effect of boosting pre-tax profits for both first-half 1996 and 1997 by £6.2 million and £5.8 million respectively. But this goodwill treatment will be reversed back to the previous write off through the profit-and-loss account once the proposed FRED12 financial reporting standard compels companies to amortise and capitalise goodwill.
The once-off change to the goodwill policy has resulted in a rise in pre-tax profits but the increase in earnings per share was 15.6 per cent, compared to the 18.8 per cent growth in earnings per share that the previous goodwill treatment would have produced.
Kerry's ingredients business benefited for higher volumes and lower raw material costs in the first half of 1997 compared to the same period in 1996 when floods in the American midwest drove up raw material prices to a level where they ate into earnings. That was reversed in the most recent half-year, with turnover up 7 per cent and operating profits in the division up 11 per cent.
The consumer foods businesses - concentrated mainly in Ireland and the UK - also had a good first half, benefiting from strong demand for the group's branded pork and poultry products in the UK. As a result, operating margins improved from 4.4 per cent to 4.8 per cent, with sales up 6 per cent to £241 million.
The Irish-based businesses, however, suffered a setback, with operating profits falling from £12.4 million to £11.5 million. "Irish profits are still being hit by raw material costs. . . we can't grow profits in Ireland at the same level as overseas," the spokesman added.
The rise in the value of the dollar from June 1996 to June 1997 hit to the tune of £24.8 million in the debt repayment side, with net debt falling from £372 million to £349 million. The interest cover, however, rose from 2.8 times to 3.5 times. Cash flow from operations fell from £43.2 million to £16.8 million but is thought to reflect the build up in raw material stocks at the lower prices that currently operate. The results, when adjusted for goodwill, were comfortably ahead of market forecasts. Riada analyst Mr Joe Gill has increased his post-goodwill earnings forecast for the full-year from 37p to 39p and his post-goodwill pre-tax profits forecast from £60.7 million to £64.5 million.
The shares were unchanged at 705p, but were well-supported at that level.
